Clear Eyed Capitalist

Investing in Energy Efficiency – PACE

In 1989 Amory Lovins gave a keynote address at a green energy conference in Montreal. In that address he talked about a brave new future where instead of investing in megawatts, we’d begin to invest in “Negawatts” – the avoided costs created by implementing electrical efficiency measures. Why does your utility give you free compact fluorescent lightbulbs like they were candy? Because already by 1989 it was found to be cheaper to give away energy efficient lightbulbs than to operate existing power stations. Amory’s vision was that to solve our energy crisis we needed to work both the angle of supply AND the angle of demand.

Creating energy efficiency requires financing: someone has to spend capital intitially to change some basic system – replace lightbulbs; add insulation; upgrade thermostats and circulation; and beyond. Then they reap the benefits of that system. At some point enough benefits accrue that you’ve paid back that original investment, but the longer it takes, the less motivated people are to make the initial investment. Especially if it takes longer than you anticipate remaining in the property! That initial capital investment might also cost more than you have handy to spend, so the next challenge is financing – a way for someone else to lend the capital up front and also reap a motivating reward for lending the money. Another challenge for financing property modifications is split-incentives – with rental properties, the owner usually pays for capital improvements, but the renter often pays the utilities, so who pays and who benefits are not the same.

In 2009 the California Institute for Energy and the Environment published an excellent roundup of various efforts to-date to create financing initiatives for residential clean energy. The paper reviews 18 residential efficiency financing programs with a focus on On-Bill Financing programs. “This research revealed several limitations of these programs including: limited applicability of the programs to households most in need, low participation rates, difficulty assuring that savings will exceed payments, limited support for comprehensive energy retrofits, the inability of most programs to cover their costs, and issues particular to OBF programs.” (Fuller, 2009)

One of the programs covered in the paper was the Berkeley FIRST program: Financing Initative for Renewable and Solar Technology. It was a pilot project designed to finance residential solar upgrades and repay them over 20 years through a special tax added to the property bill. This addresses the challenge of having the capital up front to pay for the system, as well as a way to pay it back over a long time so it’s less expensive than the savings. A key innovation here is that tying the payback to the property instead of the person keeps the payback tied to the savings – so that if the house sells to a new owner the original owner isn’t still stuck with the payments.

According to the evaluation on the Berkeley website, the city of Berkeley allocated bond funding to finance up to 40 installations. Of the 40 original applicants only 13 were actually financed. Many of the remainder discovered they were able to get home equity loans instead (the bond interest rate was twice that of the home equity loans) and did ultimately install solar. One owner cited as a barrier “…ridiculous prepayment penalties, I am very exposed if I attempt to sell or refinance the house, and the new lender demands that I pay off BerkeleyFirst.” (Berkeley First Initial Evaluation) I’ve been hearing about PACE for nearly a year so I’m surprised to find that the Berkeley pilot only concluded last year. It was discontinued because of high costs relative to small scale according to a very nice case study at the Home Performance Resource Center.

To handle the administration of the program, Berkeley partnered with Renewable Funding, LLC, which took the responsibility of marketing the bonds. By June of 2009, Palm Desert, California and Boulder, Colorado were working on their own programs. The program began spreading faster than hot celebrity gossip: more than 200 cities are reported to be considering the program. However it seems the buzz has preceeded the reality (not unlike celebrity gossip, I imagine). According to PACE Now, 30 legislative bodies (city/county/state) have passed legislation to-date enabling such programs. A Dow Jones report notes that Boulder and Sonoma County California had made hundreds of loans, yet interestingly the city of San Francisco is reported to have suspended their program before it started.

The objectors went national on July 6, 2010 when the Federal Housing Finance Agency determined that “certain energy retrofit lending programs present significant safety and soundness concerns that must be addressed by Fannie Mae, Freddie Mac and the Federal Home loan Banks…. Under most of these programs, such loans acquire a priority lien over existing mortgages, though certain states have chosen not to adopt such priority positions for their loans.” Essentially, the government agencies who buy mortgages are dismayed that that cities are lending (by issuing bonds) money to homeowners (for clean energy upgrades) and then inserting themselves with first right to repayment (because often tax obligations come ahead of mortgage obligations). So it’s pushback because of the credit crisis.

A week later the State of California filed suit in federal court arguing that the FHFA is misrepresenting the nature of PACE programs. A big motivation for states and municipalities is the anticipated economic stimulus and creation of green jobs that could come from a flurry of home energy upgrades. The lobbying battle has begun. You can get involved in your local advocacy efforts via the Pace Now website.

On the commercial side, cutting edge innovation involves the creation of Managed Energy Service Agreements (MESA) where a third party inserts between the property owner and the utilities, finances energy efficiency upgrades and then harvests the savings for return. But that will have to be another blog.

Like this:

Related

One Response

I found your post next to mine, which addresses this very problem using a privately funded model. Consistent with the negawatts concept, we find homes that have the highest electric consumption in California, give them $2,000 to use our renewable energy services, then guarantee we can save them $500 a year (and probably more) if they use our program. Our process is not effected by the current drama between the government agencies; and wouldn’t you hope for a private sector solution to getting solar on homes that use the most electricity?